My never-ending quest for a formula to call a market turn led me to ask a question: Can you make lemonade out of lemons, even if you buy at a market peak?
I went back to 2002 and, using price data from the Federal Home Finance Administration (FHFA) and 30-year mortgage rates over history, I looked to see what the net cash return would be, by year, for purchasing a home that sold at the 2006 market peak for $400,000. Obviously, that home would have sold for less than that in 2002, and then after the bubble burst. But we know from FHFA what the relative differences were.
I assumed a 10-percent down payment, buyer closing costs of three percent, and seller closing costs of six percent. The columns are purchase years and the rows are sale years. For example, if you bought that home in 2002 and sold in 2018, just made the standard mortgage payment, and didn’t refinance, your net gain (cash you get at closing minus cash you paid at purchase), was $205,000.
Now look at the 2006 column (the peak of the bubble). If you kept that home through the whole crash and sold in 2018, you would have ended up $19,000 ahead. Which admittedly is not much, but is not a six-figure loss either.
What does this mean for today’s buyers? Here are four bits of advice if you’re nervous about buying at these price levels:
1. Plan to keep the home for at least 10 years. Even in the face of a market disaster like 2007-10, those who held on ended up all right.
2. Don’t monitor your equity daily. Just keep paying the mortgage and wait it out.
3. Buy carefully. Look for neighborhoods poised for renewal.
4. Don’t buy all the way to your qualification limit. Just because your mortgage broker says you can buy up to (say) $500k, doesn’t mean you need to do that.
James Oaksun, Florida's Real Estate Geek(SM), is Broker-Owner of New Realty Concepts in Oakland Park. In addition to having degrees from Dartmouth and Cornell, he is a Graduate of the Realtor Institute (GRI).